Audio Clips

17 January 2012

The Truth About Rich vs. Poor

Veronique de Rugy recently wrote an article highlighting the problem with the Occupy argument that the wealthiest 1% are getting richer at the expense of the 99% of the rest of us. The problem with that argument is that the 1% is a group that is constantly in flux. It's not the same people year to year and decade to decade. I recently listened to an interview with Niall Ferguson, a history professor at Harvard, in which he said that he was much more concerned about income mobility that income inequality. As long as society allows for people to make advances through hard work and perseverence, income inequality is just a temporary and meaningless measure. Here are a couple of the highlights from the article.

But even if the top 1 percent were still pulling down one-fifth
of national income, this doesn’t mean that the remaining 99 percent
are worse off, contrary to popular belief. Rather, as Kaplan
correctly observed, “Income is not a zero-sum game. Somebody else’s
income does not come at your expense. It could…but in general these
numbers don’t have automatic implications for the 99 percent.”
These kinds of comparisons don’t tell us anything about the
absolute conditions of lower income earners.
For instance, even though the lower earners have a smaller share
of income today than they did in 1990, their absolute income is
higher. A smaller share of a larger national pie can still mean
more income than the bigger slice of a smaller pie. This is true
even after you consider growth in population. According to
IRS statistics, in 1990, the bottom 50 percent of income
earners reported 15 percent of real adjusted gross income,
some $517 billion in pre-tax income. In 2007, they reported only 12
percent of AGI, but this percentage amounted to more absolute
dollars—some $1.1 trillion in pre-tax income.

But even these figures miss a more fundamental point. The top 1
percent in 1990 are not necessarily the same people as the
top 1 percent in 2012. Data describing comparative income
performance generally do not take into account the movement of
individual households through time. There is no accurate assessment
of the income gap without accounting for income mobility. The more
the mobility, the less the significance of widening income
disparities.

So what does that mobility look like? Take the top earners in
America. Using IRS data, the Tax Foundation has shown that of
the 675,000 taxpayers who reported $1 million in pre-tax
income at some point between 1999 and 2007, only about half
remained millionaires just one year later (see figure). A tiny
6 percent, or 38,000 people, retained their millionaire status for
all nine years. In other words, most top earners are likely to lose
their membership in the millionaires club.

And things look rosier at the bottom of income distribution,
too. The same Tax Foundation analysis showed that about 60 percent
of households that were in the lowest income quintile in 1999 had
moved to a higher quintile by 2007. And about one-third of
those in the lowest quintile moved to the middle quintile or
higher. While it may be difficult to rise literally from rags to
riches, there is still plenty of opportunity for Americans to climb
up the income ladder.

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